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What to Do About Online Sales and Sales Tax

What should be done with online retailers and sales tax? The story is the same in most states – they’re not required to pay and most consumers don’t volunteer for the "use tax" in place in many areas. With state fiscal challenges and online sales both growing, don’t expect this issue to go away soon. The Pittsburgh Post-Gazette writes:

If you buy Christmas gifts online this year, you may be saving money on your end, but you might also be costing the state treasury its fair share of sales tax revenue.

State revenue departments across the country have complained for years that big online retailers aren’t remitting their share of sales taxes. At stake are the hundreds of millions of dollars that Pennsylvania and other states are losing when a shopper buys a CD, book or television online, instead of in a bricks-and-mortar store.

In Pennsylvania, the Department of Revenue estimates that the state is missing out on nearly $300 million in sales tax every year.

"Pennsylvania is not the only state in this boat," said Stephanie Weyant, spokeswoman for the revenue department.

Every year since Internet shopping began being measured, the amount spent online has increased annually. On Cyber Monday alone — the Monday after Thanksgiving — about $900 million was spent online this year, either at stores that operate exclusively in the cybersphere, such as Amazon.com, or at the online divisions of actual stores, such as Best Buy.

Online retailers that do not maintain a physical presence in Pennsylvania are not required to remit a sales tax (though some do so voluntarily), thanks to a 1992 court decision that predates the era of Internet shopping. In Quill Corp. v. North Dakota, the Supreme Court ruled that a retailer or purveyor of goods couldn’t be forced to remit sales taxes to another state unless it had some kind of "nexus" there, a physical presence such as a store or warehouse.

For years, Congress has been debating federal legislation requiring all retailers to figure out how to remit the sales tax to the appropriate state, but so far, the law has gained little traction and has been opposed by Amazon.com, considered to be the biggest cyber-fish out there.

While Congress has been inactive on the issue, New York has been proactive, passing a law that requires Amazon.com and other Internet retailers to collect sales taxes on transactions with New York customers. Amazon challenged the law, lost in January, and now a New York appeals court is expected to issue its own ruling soon, according to a report in The New York Times. If the law stands, other state legislatures would be tempted to follow the same legislative path, especially given the depleted condition of many state treasuries.